CVS has launched its own mobile wallet — and it's poised for success

CVS announced the launch of CVS Pay, a proprietary mobile wallet housed within the CVS Pharmacy app.

The app, which integrates payment, prescription pickup, and the ExtraCare loyalty program, is live in select Mid-Atlantic stores and will roll out nationally by the end of the year.

To use CVS Pay, customers present a barcode or five-digit number to the in-store or drive-through cashier, who then scans it and allows the customer to select a payment method from credit or debit cards preloaded into the app.

Customers then complete the rest of the transaction, like signature authentication, within the app rather than on the terminal. This could boost app engagement because it gives consumers a new way to use their phones, which are becoming a primary computing device, as part of an in-store shopping experience.

As a standalone platform, CVS Pay is poised for success for a few reasons:

Limited competition: CVS doesn't accept other contactless mobile wallets, like Apple Pay and Android Pay (though Samsung Pay works, thanks to its proprietary MST technology that enables Samsung Pay to work almost anywhere consumers can swipe or tap a card). That means that for the moment, if users want to pay by phone, CVS Pay will be their only option.

Large, engaged addressable base: Because CVS Pay is housed within the existing CVS Pharmacy app, it could easily attract and convert a portion of the firm's existing app users, particularly because it incorporates loyalty — an in-demand feature among potential mobile wallet users. That's especially true because the wallet contains a number of prescription-specific features that could provide an incentive for adoption among customers that fill prescriptions at CVS and therefore return to the pharmacy regularly. And these wallets tend to be sticky — Walmart, which offers a similar product, said that 80% of its Walmart Pay users are repeat customers.

Consumer preference: Data from Parks Associates shows that US consumers prefer retailer-based options to general-purpose mobile wallets. These platforms can attract tremendous popularity — Starbucks now processes 25% of its US payments through its mobile app.

But the end of wallet consortium MCX is creating fragmentation in the market, which could hinder overall wallet adoption. CVS is a member of Merchant Customer Exchange (MCX), which shut down the pilot program of its QR-code mobile wallet earlier this summer. Several MCX merchant partners, like CVS and Walmart, have been pushed to develop their own wallets.

Though a larger number of wallets could boost consumer awareness of contactless payments, downloading and remembering to use individual wallets for every retail location adds friction for users. That means that the market for retailer specific apps could saturate relatively quickly after onboarding the most loyal customers while pushing other users back to traditional credit or debit cards.

Mobile payments are becoming more popular, but they still face some high barriers, such as consumers' continued loyalty to traditional payment methods and fragmented acceptance among merchants. But as loyalty programs are integrated and more consumers rely on their mobile wallets for other features like in-app payments, adoption and usage will surge over the next few years.

Evan Bakker, research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on mobile payments that forecasts the growth of in-store mobile payments in the U.S., analyzes the performance of major mobile wallets like Apple Pay, Android Pay, and Samsung Pay, and addresses the barriers holding mobile payments back as well as the benefits that will propel adoption.

Here are some key takeaways from the report:

In our latest US in-store mobile payments forecast, we find that volume will reach $75 billion this year. We expect volume to pick up significantly by 2020, reaching $503 billion. This reflects a compound annual growth rate (CAGR) of 80% between 2015 and 2020.

Consumer interest is the primary barrier to mobile payments adoption. Surveys indicate that the issue is less the mobile wallet itself and more that people remain loyal to traditional payment methods and show little enthusiasm for picking up new habits.

Integrated loyalty programs and other add-on features will be key to mobile wallets taking off. Consumers are showing interest in wallets with integrated loyalty programs. Other potential add-ons, like in-app, in-browser, and P2P payments, will also start fueling adoption. This strategy has been proved successful in China with platforms like WeChat and Alipay.

In full, the report:

Forecasts the growth of US in-store mobile payments volume and users through 2020.

Reviews the performance of major mobile wallets like Apple Pay and Samsung Pay.

Addresses the key barriers that are preventing mobile in-store payments from taking off.

Identifies the growth drivers that will ultimately carve a path for mainstream adoption.

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